Question

What is “insurance death spiral,” and how might it affect the functioning of insurance markets?

Answer 1

Insurance death spiral can be referred to a situation where costs increases rapidly due to demographic changes in the population covered . It is a consequense of adverse selection problem in insurance sector . Lower risk policy holders either change policies or chose to remain uninsured . When a person opts for an insurance policy they are assigned to a certain risk pool . But the determination of the risk level can never be done efficently . Here comes the problem of adverse selection . People with higher risk lifestyle tend to be insured more . So when such people are more covered costs of the company increases rapidly .

Either the insurance market witness a fall in supply with many insurance firms going out of market due to high costs or the price of an insurance policy or the premium paid to be covered rises to much to cover the costs .